Does Causal Relationships Exist between External Trade and Foreign Direct Investment Flow to Agriculture in Ghana?

Abstract

The paper investigated the short-run and long-run relationship between external merchandise Agricultural trade and Foreign Direct Investment (FDI) inflows into the Agricultural sector of Ghana. The study employed Granger's instantaneous causality to assess the short-run relationship and feedback model to investigate the long-run relationships. Following the existence of unit-roots for the variables as well as cointegration, the Toda-Yamamoto procedure was followed for the estimation of the Vector Autoregressive (VAR) models. In the short-run, the coefficient for FDI inflows and imports were statistically significant. The negative sign pointed to a substitution or replacing relationship between the two variables. The coefficients between exports and FDI though negative, were not statistically significant. In the long-run, there was a feedback between imports and FDI. Exports caused FDI but not the reverse. Notwithstanding the transitory substitution effect of imports and FDI, in the long-run, imports and FDI complemented each other. Trade and FDI promotion should be pursued together.